FCA Alert : Lawyers & Attorneys for Whistleblower, False Claims Act & Qui Tam Defense : Kelley Drye & Warren LLP

FFELP provides financial assistance to private lenders of qualified student loans in the form of interest rate subsidies, defaulted loan reimbursements and special allowance payments.  The relator alleged that Nelnet continuously violated FFELP regulations by offering improper inducements to its loan advisors and engaging in fraudulent advertising in order to attract student borrowers.  According to the relator, Nelnet’s continuous violations of the FFELP made it ineligible to receive payments and subsidies under the program, and thus Nelnet’s application for financial assistance during this time constituted violations of the FCA under a theory of false certification.    

The court ruled that there was no false certification because violations of the FFELP did not automatically result in loss of eligibility.  Rather, a previously qualified lender loses its FFELP status only after the government elects to terminate the lender’s participation after a formal administrative proceeding.  The court also found it significant that FFELP regulations already set forth available remedies against noncompliant lenders, including recovery of previously paid claims, imposition of civil fines, revocation of eligibility status, suspension and termination.  As the court stated, when a “statute creates a complex monitoring and remedial scheme that ends FFELP payments only as a last resort,” the FCA should not be applied to “undermine the government’s own regulatory procedures.”   

Moreover, the court noted that the FFELP regulations concerning prohibited inducements and advertisements were merely conditions of participation, and not conditions of payment that are material to the government’s decision to pay.  For example, the court observed that the government would still have provided insurance benefits and guarantees on behalf of defaulting borrowers irrespective of the alleged violations by the lender.  

The relator also alleged that two major banks entered into loan servicing agreements with Nelnet and had used the latter as a conduit to make false claims on FFELP loans.  The court went on to dismiss the conspiracy claims against the banks because it found no violation of the FCA by Nelnet.  

The complaint in this case was filed in July 2007.  However, in March 2007, the New York Attorney General Office announced its investigation of the student loan industry for deceptive practices and specifically the provision of kickbacks and improper inducements to schools and financial aid officers in exchange for preferred-lender deals.  The New York Attorney General Office named six lenders in its investigation, including Sallie Mae and Nelnet.  Earlier this year, the Eastern District Court of Virginia in United States ex rel. Jones v. Collegiate Funding Services, Inc., et al., 2011 WL 129842 (E.D. Va. Jan. 12, 2011), also dismissed FCA claims against FFELP participating lenders because the relators’ knowledge originated from, among other things, news articles detailing the New York Attorney General’s investigation into the student loan industry.

UnaHealth first applied for a grant from the Department of Health and Human Services in November 2003. In that application, UnaHealth certified that it “will establish safeguards to prohibit employees from using their positions for a purpose that constitutes or presents the appearance of personal or organizational conflict of interest, or personal gain and that it will comply with all applicable requirements of all other federal laws, executive orders, regulations and policies governing this program.” In December 2004, UnaHealth hired an interim CEO, Dr. Bruce Whyte. In January 2005, UnaHealth purchased over $109,000 of computer equipment and services from Companion Technologies Corporation with grant money, while Whyte was allegedly serving as a consultant for this company. Parato was hired as the permanent CEO in July 2005, and UnaHealth submitted a second application for grant money in August 2005. This timeline makes it very difficult for a plaintiff to establish a false certification in violation of the FCA, referred to by the court as “promissory fraud”, and ultimately proved fatal to Parato’s claim.

The court held:

Although courts have held that promissory fraud can give rise to an FCA claim, it is a difficult theory under which to proceed…for a claim of promissory fraud to be actionable, the Plaintiff must show that the “promise” was false when made…Parato must show that, at the time UnaHealth submitted its Section 330 grant applications, UnaHealth had no intention of fulfilling the assurances or complying with applicable HHS regulations and requirements.

The Court explained that UnaHealth could not have made false promises regarding Whyte’s conduct in its November 2003 application because UnaHealth had not even contemplated hiring him. Additionally, the assurances in the August 2005 did not apply to Whyte’s purchase in January 2005, since the purchase was past conduct. The certification applies to future conduct. This case highlights important limitations on false certification/promissory fraud theories. Scienter is an element of any FCA claim. The defendant has to “knowingly” make a “false” or “fraudulent” statement, which means that the defendant knew the statement was false at the time it was made. Since certifications in applications usually apply to future conduct, a plaintiff may need to establish that the defendant intended to commit fraud from the very beginning or long before the allegedly fraudulent claim arises.

The Allegations

According to a J & J document cited by the court, Omnicare has over 900 consultant pharmacists who make recommendations to nursing homes regarding patients’ medications and those recommendations are accepted more than 80% of the time.  The plaintiffs allege that J & J “funneled kickbacks through Omnicare to the consultant pharmacists to induce them to recommend J & J drugs over those of its competitors.”  Omnicare pharmacists were allegedly encouraged to develop “intervention” programs” designed to shift market share to J & J drugs, and J & J paid rebates to Omnicare based on the success of these intervention programs.  The government also alleges that, when the high level of rebates J & J was paying Omnicare threatened to trigger an obligation that J & J pay rebates to the Medicaid program, J & J began disguising the alleged kickbacks as payments for data previously provided by Omnicare free of charge, “grants,” “educational funding,” and “meeting sponsorship fees.”   

The Legal Theory - False Certification

The United States argued that Omnicare certified compliance with the Anti-Kickback Statute by certifying compliance with “all applicable state and federal laws” in the Medicaid provider agreement and in the claims for reimbursement submitted to Medicaid.  J & J countered with a line of cases holding that broad certifications like these are insufficient to create liability because they fail to explicitly refer to a statute and make the certification a precondition of payment.  The court rejected J & J’s arguments, holding:

The court agrees that in the case of the AKS [Anti-Kickback Statute], compliance is not merely a condition of participation in federal health care programs, but is also material to the government's decision to pay any claim resulting from a kickback…some regulations or statutes may be so integral to the government’s payment decision as to make any divide between conditions of participation and conditions of payment a distinction without a difference.

Dismissal of Relator Claims Based on Public Disclosure And First-To-File Bars

The False Claims Act bars later filed actions based on the same facts, as well as actions where the allegations had been publicly disclosed and the relator is not an “original source” of information.   Relator Lisitza filed his qui tam complaint in 2003, and Kammerer filed his complaint two years later. 

First, J & J argued that both cases were barred by a False Claims Act case filed in 2002 against Omnicare making, what the court characterized as, “for all practical purposes” “identical” allegations against Omnicare as those made in Lisitza’s and Kammerer’s complaints.  The court, however, held that the suit did not put the government on notice of alleged fraud by J & J because no member of the J & J corporate family was named as a defendant.  (Omnicare settled that case, which was consolidated with other cases brought against Omnicare by Lisitza and Kammerer, for $98 million.  Click here for the DOJ press release.)  The court also found that a parallel lawsuit filed by Lisitza in Illinois did not bar the case because Lisitza should not be “penalized for sounding the alarm” in multiple fora. 

Kammerer’s lawsuit, in contrast, did not fare as well.  The court held that Kammerer’s complaint “simply adds a sprinkle of factual garnish” to what had already been alleged in Lisitza’s complaint.  Thus, since Lisitza filed first, Kammerer’s suit was barred.  The court also barred Lisitza’s claims regarding “best price” allegations because they were publicly disclosed in other lawsuits previously filed.  Lisitza failed to meet the “original source” exception to the public disclosure bar because he did not have “direct and independent knowledge of the information on which the allegations are based.”

Proof of an Actual False Claim

The Court rejected J & J’s Rule 9(b) arguments, but left one interesting argument open for the summary judgment stage.  J & J aptly points out that the plaintiff must prove an actual false claim.  J & J argues that the implication of plaintiffs’ allegations is that all of the claims for reimbursement for J & J’s drugs were the result of kickbacks, meaning “Plaintiffs would have to take the nonsensical position that no J & J product ever would have been provided to a nursing patient by Omnicare but for the purported ‘kickbacks.’  That claim is belied by the United States’ complaint itself, which acknowledges that, even before the period at issue, Omnicare purchased more than $100 million in J & J product.”  In other words, the plaintiffs should have to show on which occasions, if any, J & J drugs were prescribed as a result of the alleged kickbacks. 

In 2002, in United States ex rel. Swan et al. v. Covenant Care, Inc., 279 F. Supp.2d 1212, a court in the Eastern District of California issued a summary judgment opinion that cast serious doubt on the viability of quality of care claims under the FCA. In Swan, the relators, both of whom were advocates for nursing home reform, alleged they personally witnessed multiple instances of substandard patient care at various nursing homes operated by the defendant in California and Illinois. The relators further alleged that the defendant nursing homes falsified forms to indicate that patients received care, including bathing, feeding, and wound treatment, that was never provided. The relators alleged this conduct violated the FCA under worthless services and false certification theories. The court held that the relators failed to state a claim under the FCA under any of the theories they alleged. The court held there was no worthless services claim because the relators did not allege that the nursing homes’ care was so poor that it was the equivalent of no performance at all. The court observed that payment by the government to the nursing homes was based on a per diem rate that included a bundle of services, including room, board, and patient care. Because some of these services were provided, the relator’s worthless services claim could not survive. The court also held there was no false certification claim because the relator introduced no evidence to demonstrate that the nursing homes certified compliance with the applicable Medicare regulations as a prerequisite to receiving federal payment. The court granted the nursing homes’ motion for summary judgment and dismissed the action.

Since the Swan decision, a number of other courts have followed suit and dismissed quality of care cases for failure to state a claim under worthless services and/or false certification theories of FCA liability. See, e.g., United States ex rel. Landers v. Baptist Memorial Health Care Corp., 525 F. Supp.2d 972 (W.D. Tenn. 2007) (granting defendants’ summary judgment in qui tam action); United States ex rel. Lockyer v. Hawaii Pacific Health, 490 F. Supp.2d 1062 (D. Haw. 2007) (granting defendants’ motion for summary judgment in action in which government intervened); United States ex rel. Sweeney v. Manorcare Health Services, Inc., 2005 WL 4030950 (W.D. Wash. 2005) (granting defendants’ motion to dismiss in qui tam action).

With that background in mind, let’s turn our attention back to the Dialysis Clinic case. The relator filed a qui tam complaint under seal in June 2009 and filed an amended complaint under seal several weeks later. Seven months later, in February 2010, the government informed the court that it had declined to intervene in the action, and the complaint was unsealed. The defendant moved to dismiss the complaint for failure to state a claim under Rule 12(b)(6); failure to plead fraud with particularity under Rule 9(b); and lack of subject matter jurisdiction under Rule 12(b)(1). The relator sought leave to file a second amended complaint. The court granted the relator’s motion to amend, and then dismissed the second amended complaint with prejudice under Rules 9(b) and 12(b)(6).

The Dialysis Clinic case is a good example for FCA defendants of the grounds that can be successfully asserted in a motion to dismiss a qui tam case in which the government does not intervene. In such cases, Rules 12(b)(1), 9(b), and 12(b)(6) are powerful weapons for the defense. Of the 4,628 relator-only FCA cases that were unsealed between 1987 and 2010, 3,962 (or 86%) of those cases have been dismissed.

Part II of this post will examine the court’s decision on the Rule 9(b) and 12(b)(6) motions, and Part III will discuss the court’s decision on the Rule 12(b)(1) motion based on the FCA’s public disclosure bar.

Applying Fourth Circuit precedent, the court found that relators’ allegations had been based on prior public disclosures by then-New York Attorney General Andrew Cuomo, the defendants’ own SEC filings, and newspaper articles. The court also found that relators were not original sources of the information based on their failure to demonstrate how they could have learned of this alleged conduct from their roles as telemarketers at defendants. Interestingly, the court noted relators’ attorney’s history of recruiting former employees of student lenders to serve as qui tam relators.

Next, relators alleged that defendants paid illegal bonus payments to employees based on the number of student-loan applications initiated daily and engaged in marketing tactics designed to mislead borrowers into believing defendants’ direct mailings were from the federal government. According to relators, this alleged conduct rendered false the certifications of compliance prepared in connection with such loans in the event that the loan went into default and resulted in the submission of a claim for payment to the government.

The court found subject matter jurisdiction to be proper as to these allegations, but dismissed the claims for failure to plead with particularity as required under Fed. R. Civ. Proc. 9(b). The court held that relators failed to provide facts showing that any claims were submitted to the government or that the purportedly false certifications were made to get a false claim paid by the government. The court denied leave to amend.